By Noah Rothstein
Inflation heated up in June, driven by continued strong consumer demand and lingering supply constraints. Overall consumer prices rose 5.4% in June from the previous year, the highest 12-month rate since August 2008, the Labor Department said.
There are four main trends underlying the June inflation report. First are the items where prices fell sharply at the start of the pandemic and are now returning to their pre-pandemic levels. Second are items where prices have temporarily risen above their pre-pandemic levels due to supply constraints and could come down. Third are items where prices are likely settling at a permanently higher level. Fourth are items where price increases have slowed rather than accelerated as a result of the pandemic, at least for now.
These trends exert competing forces on overall inflation as the economy adjusts to a new normal, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“It’s very unlikely a year from now we’d be seeing this continued type of rate of change in inflation,” she said.
Airfares and hotel prices collapsed at the start of the pandemic as Americans canceled travel plans and stayed home to avoid getting exposed to COVID-19. Now that vaccination rates are rising, people are booking summer trips, and business travel is picking up.
The surge in travelers has boosted airline and hotel prices. Airfares in June were 24.6% higher than a year ago. Hotel prices were up 16.9% on the year.
But prices for both items remain below where they were two years ago, in June 2019, before the start of the pandemic. That suggests they still have room to rise in the months ahead before they reach their pre-pandemic levels.
Manufacturers closed factories at the beginning of the pandemic but are now scrambling to ramp up production to meet a surge in demand. That, combined with a global shortage of computer chips, has caused prices to rise rapidly for items such as new cars. Higher new-car prices have led buyers to move to the used-car market, driving prices up there as well.
Prices for new cars were about 5.1% above where they were two years ago, before the pandemic. Prices for used cars were up 41.3% over two years. The monthly used-car price increase represents about a third of total inflation in June.
Prices at restaurants rose 4.1% in June from the previous year, largely due to labor shortages. Restaurant work requires close contact with others, which has dissuaded some job seekers worried about getting sick. The lack of child-care options and a continuation of unemployment benefits may also be responsible for some restaurant workers staying out of the labor force.
In response, employers are boosting wages to draw the cooks and servers they need. According to a separate Labor Department report, wages for leisure and hospitality workers were up 7.1% in June from the previous year. That has translated into higher prices for customers.
Rent increases slowed early in the pandemic as people stayed put or decided they would rather own a home. They haven’t picked up much since then. The rent on a primary residence was up 1.9% in June from the previous year. In the months before the pandemic, rents were rising close to 4%.
Increases in owners’ equivalent rents, the Labor Department’s estimate of what homeowners would have to pay each month if they were renting their own home, also have not rebounded very far.
